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10 4 Existing home prices will continue to rise by a more moderate rate of about 3 percent in 2018. In most markets, home price appreciation will continue to bolster the psyche of the consumer, households' net worth, and homeowners' ability to spend. Going forward, the performance of the housing market will depend primarily on the performance of the labor market, with changes in mortgage rates and credit conditions playing secondary roles. Employment and personal income will grow in 2018, so more people will have the wherewithal and the confidence to buy homes, sustaining the housing market's recovery. Mortgage rates will move higher, but home mortgages should be somewhat easier to obtain, however. Credit lines and money to builders will still be somewhat scarce, restricting the supply of newly built homes. Still, supply constraints (especially the scarcity of developed lots and a shortage of skilled construction workers) will slow recovery of the single-family homebuilding industry. Stronger foreign economies and a somewhat weaker dollar will increase the number of foreign investors hunting for residential properties in this country. Foreign buyers have played a major role in the recovery of housing markets in the urban core of many large metropolitan areas, especially for luxury condos. On the plus side, several developed foreign economies (e.g. Canada) are implementing substantial new taxes on foreign real estate buyers, which will encourage foreign buyers to focus more intently on U.S. real estate markets. Nonresidential Construction Spending for new nonresidential construction will increase more slowly in 2018 than in recent years. New business formation and expansion, employment gains, and population growth will generate gains in net occupancy. In many markets, tenants no longer have the upper hand in lease negotiations. There will be some negative trends: Higher interest rates will be a slight headwind. Credit conditions for commercial builders will not ease further, and will be tight in markets with high vacancy rates. Although the U.S. dollar has weakened recently, dollar strength will continue to dampen foreign investors' interest in American real estate. These counter trends imply that the current upcycle in nonresidential real estate will lack vigor. Office and retail vacancy rates will continue to improve, but are still elevated in too many markets. Demand for new office space will increase the most in markets that benefit from growth of high tech and healthcare industries. Abundant existing space will limit retail construction, but pockets of new development will appear in the most desirable locations. Competition from online retailers limits the need to build more stores, but increases the need for more distribution centers. Industrial development will benefit from growth in industrial production, with new development focused on locations with logistical advantages. Spending for public- funded buildings will increase, thanks to heftier property tax bases, reversing the downtrend of past years. Business Spending Due to faster growth of end markets, higher commodity prices, growth in corporate profits, new business formation and expansion, less regulation, and tight labor markets, business spending for nonresidential fixed investment will be about 4 percent larger in 2018 than in 2017. Nonresidential fixed investment will be a tailwind to GDP growth. Stronger foreign GDP growth and a weaker dollar will boost export growth, which in turn will fuel business spending for investment. The need to improve productivity, good cash flows, and access to credit will support such spending. With the economy at, or beyond, full employment, an acceleration in wage growth will incentivize businesses to substitute capital for labor, which bodes well for producers of durable equipment and software. Significant downside risks to business spending for investment include federal policy uncertainty, inadequate public investment on infrastructure, and turmoil in the financial markets.